Microsoft to buy Nokia’s handset division

Microsoft Corp. finally has a smart phone strategy, striking deal to buy almost all of Nokia Corp.’s devices and services business and licence its patents for about CDN$7.6 billion.

The deal puts even more pressure on struggling BlackBerry Ltd. to come up with a solution to put it solidly back in the mobile game or risk being reduced to a niche player.

A report from the European division of IDC frames the issue: “The time for pure-play vendors has ended and the remaining ones haven’t understood that yet,” wrote Francisco Jeronimo, director of the research company’s European consumer wireless unit.

“The market will become more concentrated as economies of scale are important to survive in a market where profits will come from several slices of a pie rather than one single business, particularly if that business is hardware.

“Mobile phone vendors will realize that the only chance to succeed is by merging with content providers, with bigger manufacturers, or less likely with an operator or a large retail chain. “Whatever form it takes, concentration is key to survive as margins will continue to be squeezed by the dominant players. While Nokia has realized that and is taking action, others will continue to see their financial situation deteriorate and will take the same decision when bankruptcy is a reality.”

BlackBerry [TSX: BB] has pinned its hopes on a new range of devices launched this year running the advanced BlackBerry 10 operating system. However, sales of the Z10 and Q10 have failed to budge its market share, although CEO Thorsen Heins warned there won’t be a quick turn-around.

While selling the company or merging with a partner was always a possibility, last month the board signaled the time had come to look more seriously at those options by establishing a special committee to look into those options.

The deal means BlackBerry will have a more formidable competitor in Microsoft, said Kevin Restivo, a mobile analyst with IDC Canada. “It (also) means there’s more distance between BlackBerry and its primary operating system competitors [Apple iOS and Google Android] than ever.”

“It makes any kind of comeback for BlackBerry increasingly difficult.”

Any smart phone competitor has to increase the pace of its execution to challenge iOS and Android, he added.

For Nokia, based in Finland, the deal means an end to its time as an independent leader in mobile. Overwhelmed by an old operating system and a flood of sales by Apple Inc.’s iPhone and smart phones made by competitors using the Android operating systems, sales of its handsets plummeted.

Only after a 2011 partnership with Microsoft that put Windows Phone on a new line of Lumia smart phones has it seen some hope. In the second quarter Nokia sold 53.7 million handsets, of which 7.4 million were Lumias. That helped push Windows Phone into third place in mobile operating systems.

“With our global surveys indicating gradually improving Windows Phone 8 smartphone sales due to strong sales of the Lumia 520 and other mid/low-tier Lumia smartphones, we believe the timing makes sense for Microsoft to purchase Nokia’s devices and services business in order to fund stronger long-term growth trends,” wrote financial analyst Michael Walkley of Canaccord Genuity in a note to investors this morning.

The deal is expected to close early next year.

“We believe Microsoft [Nasdaq: MSFT] with its strong balance sheet and increased focus on hardware devices can help accelerate the growing WP8 smartphone momentum. We estimate Lumia sales now constitute over 85 per cent of WP8 smartphone sales. We believe Microsoft has recently worked more in concert with Nokia to drive sales, as evidenced by Microsoft’s advertising campaign featuring Lumia features and by Nokia 1020’s ranking as a top three selling smartphone at AT&T.”

Nokia CEO Stephen Elop – a former Microsoft exec — will step down from that post to become executive vice-president of the devices and services division and will stay with Microsoft when the deal if finalized.

When it is, some 32,000 Nokia people will become Microsoft staffers. Microsoft also announced it will set up a new data centre in Finland to serve its European customers, promising to invest more than $250 million in it.

When completed the deal will leave Nokia centred around its NSN carrier equipment making division and its HERE unit, a location-based digital maps service.

“It’s a bold step into the future – a win-win for employees, shareholders and consumers of both companies,” Microsoft CEO Steve Ballmer said in a statement. “Bringing these great teams together will accelerate Microsoft’s share and profits in phones, and strengthen the overall opportunities for both Microsoft and our partners across our entire family of devices and services.

“In addition to their innovation and strength in phones at all price points, Nokia brings proven capability and talent in critical areas such as hardware design and engineering, supply chain and manufacturing management, and hardware sales, marketing and distribution.”

“While enabling Microsoft to face industry rivals such as Apple, Google and Samsung on more equal terms, it also represents an indicator for the future of consumer tech industry more generally and a symbolic end to the mobile phone industry we’ve known until today,” wrote Tony Cripps, principal device analyst at Ovum.

Still, he said, “there is still much to resolve if the acquisition is really to have meaningful impact. While Microsoft and Nokia have jointly been increasing the money flow through the Windows Phone marketing faucet of late it will take mega bucks to take on Apple and Android head-cheerleader Samsung for marketing volume and volume shipments. We need to see that kind of commitment coming before we can really count Microsoft in the same league as its two main competitors.

“There is also a sense that while Microsoft has many of the key elements for consumer tech market success in place too many of those elements feel not quite at parity with their rivals.”

Currently a freelance writer, I'm the former editor of ITWorldCanada.com and Computing Canada. An IT journalist since 1997, I've written for several of ITWC's sister publications including ITBusiness.ca and Computer Dealer News. Before that I was a staff reporter at the Calgary Herald and the Brampton (Ont.) Daily Times.

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